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JetBlue Airways Corporation Keeps Soaring Higher

JetBlue Airways Corporation might suddenly be the best performer in the airline industry again.

On Tuesday morning, JetBlue Airways Corporation(NASDAQ:JBLU) reported stellar Q1 earnings. The company's pre-tax income skyrocketed to $222 million from just $6 million in Q1 2014, and its EPS of $0.40 beat the average analyst estimate by $0.01.

While other airlines have been struggling just to keep passenger unit revenue, or PRASM, flat -- and many haven't succeeded -- JetBlue's PRASM rose by a substantial 4.5% last quarter. The company also expects PRASM to rise 3%-4% in April and to continue growing in May and June.

How is it that JetBlue is posting such superior results relative to the rest of the airline industry? And what does it mean for the company's future stock performance? Let's take a look.

Newer routes are maturingOne important driver of JetBlue's strong unit revenue performance is that it has started a lot of new routes in the past couple of years, which are now starting to mature. JetBlue CEO Robin Hayes noted on the earnings call that Boston and Fort Lauderdale, the two biggest centers of growth for JetBlue, also experienced faster margin growth than JetBlue's other focus cities in Q1.

Hayes specifically called out strong demand for JetBlue's Boston-Detroit route, which was begun in March 2014. This and other new routes in Boston are being helped by JetBlue's partnerships with numerous international carriers, which create connecting opportunities that JetBlue cannot provide on its own.

Mint service takes offThe quickly rising popularity of JetBlue's Mint premium service from New York to Los Angeles and San Francisco is also driving unit revenue higher. Hayes stated on the earnings call that unit revenue jumped more than 20% year over year for Mint routes last quarter.

This strong result shouldn't be too surprising. By the end of Q1, JetBlue had essentially completed the rollout of its Mint service. Moreover, demand has been so strong that JetBlue has implemented two major price increases since Mint debuted last summer. The premium cabin fares, which originally topped out at $999, can now go as high as $1,299 one way.

JetBlue has increased pricing for its Mint premium seats twice in the past year. Source: JetBlue.

The 16 premium-cabin seats on each Mint flight together account for less than 1% of JetBlue's total system capacity. But when fares for those seats are regularly three to four times higher than typical economy fares, it has a noticeable impact on unit revenue for the whole company.

Analysts aren't convinced yetDespite JetBlue's industry-leading unit revenue trends and its soaring profitability, many airline analysts still appear to be skeptical of the company. While analysts project that EPS will skyrocket to $1.79 this year -- up from just $0.70 last year -- they are projecting EPS growth of only 7% in 2016, implying that JetBlue's profit margin will shrink slightly.

Obviously, it's possible that fuel prices will move sharply higher, preventing JetBlue from maintaining or expanding its profit margin next year. But that's not the most likely outcome.

JetBlue is on track to launch its new "Fare Families" later this quarter. Fare Families will allow JetBlue to target price-sensitive travelers with lower introductory fares that do not include a free checked bag while also offering two higher fare tiers that offer purchasers a larger checked bag allowance, more frequent flier points, and other benefits.

This initiative is projected to add at least $200 million to JetBlue's bottom line when fully rolled out. Most of that benefit will come in 2016.

JetBlue is also adding larger, more fuel-efficient A321s to its fleet over the next few years, which should start contributing to noticeable fuel efficiency improvements later this year. Lastly, it will start retrofitting its A320s with 15 additional seats in Q3 2016. This will also start to bolster JetBlue's profit margin toward the end of next year.

Plenty of upside leftJetBlue stock has soared from around $8 a year ago to more than $20 today. Yet it's still valued at a very reasonable 11 times 2016 earnings estimates -- estimates that seem surprisingly low, as I discussed above.

As JetBlue moves through its key initiatives over the next couple of years -- rolling out the Fare Families, adding more A321s to the fleet, and retrofitting the A320s with extra seats -- it should be able to deliver quite a bit more earnings growth. That, in turn, could keep the stock moving higher.

Author

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry! Follow @AdamLLW